1. When the price of a normal good rises, ceteris paribus, the substitution effe
ID: 1136629 • Letter: 1
Question
1. When the price of a normal good rises, ceteris paribus, the substitution effect leads to __________ in the quantity purchased and the income effect leads to ______ in the quantity pruchased.
A. an increase; a decrease B. an increase; an increase C. a decrease; an increase D. a decrease; a decrease
2. Which of the following statements is TRUE?
A. An increase in the price of gasoline will decrease the demand for gasoline.
B. An increase in the price of gasoline will increase the quantity demanded of gasoline.
C. An increase in the price of gasoline will increase the supply of gasoline.
D. An increase in the price of gasoline will increase the quantity supplied of gasoline.
Explanation / Answer
1. When the price of a normal good rises, ceteris paribus, the substitution effect leads to a decrease in the quantity purchased and the income effect leads to a decrease in the quantity pruchased.
Substitution effect says that when the price of a good increases, the substitute good become more attractive and the quantity demanded of the good falls So substitution effect leads to decreae in quantity purchased.
Income effect says that when the price of a good increases it leads to reduce the purchasing power of the consumer means reduce the real income, so income effect leads to a decrease in the quantity purchased.
Correct ans is d) a decrease; a decrease.
2. The correct statement is :
An increase in the price of gasoline will increase the quantity supplied of gasoline.
It is so because when the price of the good increases or decreases , it resultsin the change in the quantity demanded or quantity supplied not demand or supply.
So here according to the law of supply option d) is correct
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